How Europe can lead the next industrial revolution

If Europe can digitally transform its industries and infrastructure, it can reap massive rewards in growth and job creation — even amidst volatility. But this will take work.

While Europe has emerged from the worst of the economic crisis, it continues to experience significant volatility — politically, socially and economically.

Underneath a cyclical recovery, growth is still too weak. Unemployment is twice as high as the U.S. and youth unemployment remains unacceptably high. Productivity growth is weak. (I’ll dig more into these in a minute.)

Political instability and nationalism are growing. This month, the U.K.’s vote to remain or leave the EU will have implications for the Union for decades to come. The refugee crisis continues to test European unity.

Yet for all of its well-covered issues, at GE we see unprecedented opportunity for European companies and society to reboot productivity, competitiveness and prosperity, and help the region unleash investment and growth.

This piece defines what the digital revolution can mean for European growth and job creation, evaluates Europe’s economic outlook, and outlines three steps it can take to fully realize the opportunities within its grasp. I welcome your thoughts and reactions here, on Twitter, or on GE Reports.

Sizing the opportunity

Where will this come from? For one thing, the EU represents a market of 500 million citizens that generates 24% of global GDP and accounts for 33% of total world exports. It still has huge potential, and it can do things at scale.

Meanwhile, new technological innovations are beginning to transform global industry, accelerating efficiency and productivity and changing the competitive landscape for companies and countries alike.

In the Industrial Internet we see the next great wave of productivity both for our company and for the customers we serve. Transformations don’t come much bigger than the full application of data and analytics to machines and systems — transforming traditional industrial assets into intelligent interconnected devices.

If Europe can drive this — the transformation of industry through digital, what some call the fourth industrial revolution — it can reap massive rewards in growth and job creation:

1. By 2025 the Industrial Internet can deliver a value of $1.7 trillion per year in additional EU GDP.

Three years ago, we estimated that if connected machines and advanced analytics could help make industry just 1% more efficient, the sheer scale of industrial operations across the globe would translate into substantial aggregate economic gains, valued in hundreds of billions of dollars. We stressed that we considered our “Power of 1%” to be a lower bound — the very least that we believed to be within reach.

It’s big.

But as I wrote last autumn — GE’s Industrial Internet solutions are actually delivering 20% improvements in efficiency, on average across our industries.

If performance gains of this scale can be realized across European industrial sectors, this will translate into substantial economic gain for Europe.

Industrial Internet applications will improve productivity and efficiency through a wide range of industrial sectors:

  • Software is already making power generation and distribution, including in renewables, cheaper and more efficient.
  • Data-driven solutions will reduce delays and increase speed across Europe’s rail and air transportation networks, improving the efficiency of supply chains.
  • And digital health care solutions will contribute to reduce costs while improving patient outcomes — bringing much needed relief to the economic sustainability of the region’s health care systems.

These improvements have multiplier effects. By reducing the financial burden of health care, for example, these solutions will free up resources that can be utilized to finance infrastructure investment or to reduce taxes, freeing up resources for private-sector growth. Meanwhile, improved health outcomes will lead to a healthier workforce, reducing the cost of sick leave and foregone production.

Across a range of industries, the application of digital technologies on the factory floor and across supply chains and distribution channels will boost the efficiency and productivity of European manufacturers, supporting faster export growth.

Combined with software analytics, the adoption of portable and wearable industrial devices will augment the abilities of workers at different levels of the skills distribution, accelerating productivity growth and leading to faster wage growth. This in turn will drive stronger domestic consumption.

These are a few examples of some of the digital industrial solutions that have already been developed and are ready to scale; with the power of the industrial app economy, more industry-specific solutions will be developed at an accelerating pace in the years and decades ahead.

2. Accelerating the industrial app economy will create new, high-quality European jobs.

Using software to transform European industry and infrastructure is no small feat. To do this, we are set to follow a trail already blazed by the consumer Internet: leveraging the power of the app economy.

The app economy is already an important job creator. In the EU in 2015 there were 1.3 million app developers in 2015, or 23% of the world total. These directly and indirectly supported a total of 2 million jobs, or just under 1% of total EU employment. Between 2015 and 2018, the EU app economy is expected to create another 2.9 million jobs.

Chart by Atlas

But as developers increasingly focus on building software to transform industry, an industrial app economy will grow, accelerating this job growth even further.

Industry needs an app economy to unleash its full potential. Think of your phone; the exponential growth of applications in the App Store, developed and deployed at scale, make it much more valuable to you than just a device to make calls and surf the internet.

European companies should prioritize the adoption of platforms and partnerships to jumpstart the industrial app economy and unleash its corresponding efficiency gains.

A platform acts as a tremendous accelerator. Like Google’s Android or Apple’s iOS operating systems, a platform for industry will facilitate the development of the apps and solutions that can unlock the full value of interconnected systems. It enables the interoperability necessary to scale both the solutions and the benefits. And it allows developers of all sizes, including those in startups and small- and mid-size businesses, to create applications and participate in the digital industrial revolution.

GE has already created such a platform — the Predix operating system. Our software development efforts have demonstrated that companies who choose the right apps leveraging the right platform can see a 10–15x return on their investment in developers’ capabilities.

And partnerships are also crucial to allow different businesses to collaborate, create synergies and foster the cross-fertilization of ideas that fuels innovation. GE just announced the opening of a Digital Foundry in Paris to act as the hub for a new ecosystem that would accelerate the pace of development of apps and solutions tailored to the needs and characteristics of European companies.

The GE “digital foundry” in Paris will open in August 2016. It will employ 250 data scientists, engineers and designers by 2018.

A new software center bringing together a global industrial internet leader like GE with established and new players in industry and tech would first of all impart a dramatic acceleration to the growth of industrial app economy in France — and in Europe.

Europe’s outlook

So the opportunity is massive. What’s holding Europe back? Its real GDP is a mere 3% higher today than it was in 2007. For the Eurozone, it was only last year that real GDP finally inched back above the 2007 level. It took six years just to get output levels back to where they were before the financial crisis.

By comparison, U.S. GDP is now 10% higher than in 2007; Australia’s is 22% higher. Some European countries have fared especially poorly. Italy’s economy is still 8% smaller than it was before the crisis; Spain’s is 3% smaller. Unemployment in the Eurozone is still above 10%, twice as high as in the US. Youth unemployment is alarmingly high in several European countries.

Chart by Atlas

This is partly because the European recovery from the Great Recession of 2009 was cut short by the Eurozone debt crisis, which plunged the common currency area back into recession in 2012 and 2013. Fears that the common currency area might split drove up funding costs and forced several countries to adopt painful fiscal consolidation measures.

Things have improved, and over the past two years the European economy has enjoyed robust, above-potential growth, thanks also to supportive monetary policy by the ECB, a weaker Euro, and lower energy prices.

But Europe’s long-term growth prospects remain weak. And Europe’s economy still faces some important challenges.

One is the need to give renewed impetus to the strengthening of European institutions. This is necessary not only to improve the coordination and harmonization of economic policies, but also to ensure that the cohesiveness of the single currency will no longer be questioned. This is all the more important today, since the scars of the double-dip recession have weakened popular support for the European project in a number of member countries.

The most important economic challenge, however, is to reboot productivity growth. In the decade before the financial crisis, between 1996 and 2006, productivity growth averaged a healthy 1.8% in the European Union (and a slightly lower 1.4% in the Eurozone). Over the last five years it has averaged just 0.9% per year.

In other words, European productivity growth is only half of what it used to be — and less than half of what it could be

Chart by Atlas

Productivity is the only engine of sustainable economic growth. Faster productivity growth is necessary to support rising incomes, and to ensure that the European economy can succeed in an increasingly competitive global economy.

How serious is Europe’s productivity problem? The current slow pace of productivity could be partly due to the impact of the recession: investment has been weakened, which implies that the existing capital stock has suffered greater obsolescence than normal, and that new technologies have been adopted at a slower rate than usual.

The U.S. is also experiencing much lower productivity growth than before the crisis — indeed, today productivity growth in the U.S. is even weaker than in Europe. To the extent that this hypothesis is correct, once investment picks up we should see some improvement in productivity growth.

Productivity is the only engine of sustainable economic growth.

But an increase in traditional investment will not be enough. The digital-industrial revolution that is beginning to unfold will prove a game-changer . As I outlined above, it holds the potential to greatly increase efficiency and productivity through a wide range of sectors across the global economy.

Making it happen

This new wave of innovation will rapidly change the global landscape.

Countries that move the fastest will quickly gain a significant competitive advantage. Some of these technologies will be especially helpful to emerging markets, helping them to bypass existing gaps in infrastructure and weaknesses in institutions.

If it doesn’t quickly adapt to leverage the potential of the fourth industrial revolution, Europe could fall behind. Indeed, as we noted in a previous study, two decades ago Europe was too slow in exploiting the opportunities presented by the consumer internet and ICT revolution.

Today’s digital industrial revolution is even more disruptive than the ICT revolution was then. It requires an even higher degree of flexibility, adaptability and coordination to deliver its full potential.

Here are three steps Europe can take to lead the way this time:

1. Implement recognized best practices in structural reform.

Europe still suffers from some of the same rigidities that negated the benefits of the first digital revolution. The European Commission has recently highlighted key structural reforms still needed across the EU, and in particular in its largest economies.

These include more flexible labor markets, including greater mobility; more efficient bankruptcy procedures; and removing barriers to competition in selected sectors. These reforms are already a priority; European leaders would do well to implement them quickly.

A selection of condensed country-specific productivity recommendations. Source: EC February 2016.

2. Don’t strangle the baby in its crib.

Although the potential from the Industrial Internet is huge and real progress is already happening, the truth is we are still in early days. We need to avoid throttling innovation with excessive regulation and government-driven efforts at standardization, however well-intentioned.

Data will need to flow freely across borders for Europe fully to realize the economic and societal benefits outlined above. We need a robust policy framework, both within the EU and anchored in international trade agreements, promoting the free flow of data in a trusted and secure environment, without different rules and standards for every country and dataset. If not properly managed, new regulation in these areas could of themselves become significant barriers to innovation.

Industry is already collaborating to develop standards from the bottom up. The Industrial Internet Consortium was founded in 2014, charged by its members with promoting initiatives to connect and integrate objects with people, processes, and data using common architectures, interoperability, and open standards.

We need to avoid throttling innovation with excessive regulation and government-driven efforts at standardization, however well-intentioned.

Other trade groups operating in parts of the Industrial Internet space include the Open Connectivity Foundation (encompassing the former Open Interconnect Consortium), the OpenFog Consortium, and the AllSeen Alliance. The Industrial Internet is young, moving quickly, and marked by strong private-sector-led innovation aimed at promoting interoperability.

3. Continue to invest in the workforce of the future.

These new technologies will profoundly change the way we work. There is widespread fear that they will heighten unemployment.

I believe these fears are exaggerated. Some new innovations, including the greater use of portable and wearable devices, are already augmenting the capabilities of workers at all levels of the skills distribution.

The greatest value added of new technologies can only be realized through humans and machines working in symbiosis. Like previous waves of innovations, this one too will result in more jobs and higher incomes.

But the transition will be disruptive. Some workers will be displaced. In Europe, where unemployment is already high and income inequality has increased in many countries, this could be especially damaging. Almost 25% of young people in the EU are unemployed, and some seven million young people are not enrolled in the educational system or are early school leavers.

High youth unemployment is partly due to a significant skills mismatch: even though educational achievement levels are quite high in most EU countries, a growing number of young people graduate with skills which do not match those required by employers.

This mismatch is likely to become even more pronounced as more and more businesses adopt new digital technologies. It is therefore especially important to start building the right skills for the digital-industrial era, to ensure that this transition can happen as smoothly and quickly as possible.

Education and training need to be top priorities. Improvements in education, stronger training programs, and targeted social safety nets should all play a role. Industry and the European education system need to maintain a close dialogue to ensure that the supply of skills can align itself to the rapidly shifting demand.

Europe already has some best practices, like Germany’s system of professional education and apprenticeships. But a lot more needs to be done, and companies can help. GE recently signed the pledge for the European Alliance for Apprenticeships, making a commitment to offer at least 3,000 apprentice and internship placements annually across Europe. Our target is to fill 30% of all entry-level positions through our apprentices & interns to ensure they have an easy and smooth entry to the European labour market.

GE and other companies will continue to make big bets on Europe. It is already home to eight of the twelve most competitive countries in the world. Europeans are already developing world-class technologies to solve the world’s toughest challenges in healthcare, energy, transportation, and environmental sustainability. With the right conditions in place, Europe is optimally placed to lead the digital-industrial revolution.

For more on what GE is doing in Europe, there are a ton of great materials here:

I’d love to hear what you think. Please share your responses below and join the conversation at #IndustrialInternet and #MMEurope16.